Do Not Overlook the Real Estate When Buying a Business, Part 1

Four Reasons that a Survey is Important When Buying a Business with Valuable Real Estate

This is the first of a two-part article addressing the real estate component of a business purchase.  Almost invariably, my clients looking to purchase a new business focus on gross revenues, strategies for decreasing costs, expanding customer base, manufacturing processes and other forward-looking elements of the deal.  Rarely do they focus on one of the most basic and often significant factors – the company real estate.  Whether it is a leased retail location, shared manufacturing facility or a long owned office building, a buyer should not overlook the bricks and mortar.  In Part 1 of this article, I will discuss the importance of a survey when evaluating a business purchase involving valuable real estate.  In Part 2, I will discuss issues involving leases, their evaluation, assignment and assumption.

My clients often ask whether a survey is needed as part of a new business purchase.  If the business does not own real estate or if the real estate is neither valuable nor critical to the business operation, then no, a survey may not be important.  If, however, the company owns valuable real estate or real estate critical to the business operation, then a survey is absolutely an important part of a due diligence process.  In these cases, we strongly suggest that our clients obtain a new survey or update the seller’s existing survey.  This exercise will give you a picture of the property you are about to purchase.  That picture will be an important tool as you determine whether you will control the business real estate.  The following list identifies four pieces of crucial information provided by a survey:

1. Property Boundary.  A survey will show the exact boundary of the business property.  Depending upon the type of survey obtained, it may also identify any discrepancies between the recorded legal description of the land and the physical boundary.
2. Encroachments.  The best way to confirm that the business improvements are located on business property and not on neighboring property is to look at the survey.  This will also show any encroachments from neighboring property onto land that you think belongs exclusively to the company.
3. Recorded Easements.  When buying real estate, one of the first pieces of information given to a purchaser is a Title Commitment.  Among other things, the Title Commitment lists any recorded documents that purport to encumber the real estate to be purchased.  Many of these documents are indecipherable by the layman, but a good survey will translate that written list into a picture showing exactly how the easements overlay the company property.
4. Title Insurance.  One of the important benefits of a survey is that it allows the Title Company to insure your ownership of the surveyed property description and to insure you against encroachments, easement and boundary line disputes.  This level of title coverage is inexpensive but is only available if you have a current survey of the property.

   While a survey is not a crucial component of every business purchase process, if the business owns valuable real estate a survey should not be overlooked.

If you have questions about a business purchase or real estate matter, please contact me or one of the attorneys in the Lyons Gaddis Transactional Group.